Tariffs: what you need to know when importing
You’ve probably heard a lot about tariffs in recent years. It’s fair to say that tariffs can be incredibly confusing and frustrating – not to mention costly.
Still, they are a fact of life for businesses trading internationally. As a result, it’s essential that you understand and prepare for them – if you don’t, you could land your company in hot water.
In this article, you’ll learn everything you need to know about tariffs. Plus, you’ll find out exactly how to find the cost of tariffs before you order a shipment.
What are tariffs?
Tariffs are specific taxes that governments impose on imports and exports. You may hear them referred to as customs, duties, import fees, or export fees.
There are two types of tariffs, import and export – let’s take a closer look at each of them.
What is an import tariff?
An import tariff is a tax that a government places on many products and goods brought into the country. This is the most common type of tariff – and the one that’s most likely to affect your business.
Why are import tariffs used? Here are four key reasons:
- Governments often use them in an effort to protect jobs when domestic manufacturers can’t compete with international manufacturers. For example, this may happen if another country has cheaper labor costs.
- Import tariffs are used to nurse infant industries by sheltering the developing sector from international competition. Many developing economies use this strategy when shifting from agricultural to industrial products.
- Countries may impose import tariffs on other countries to retaliate for political or economic reasons. Trade is a powerful tool that can be used to help achieve political and economic objectives.
- Trade barriers and import tariffs are employed by governments to protect industries that are considered strategically important. These industries are the ones usually supplying and supporting national security.
What is an export tariff?
An export tariff is a tax that a government places on some products and goods shipped out of the country. Export tariffs are far less common than import tariffs.
Why are export tariffs used?
Governments sometimes feel the need to protect the country’s most valuable resources – ones that are needed to maintain domestic self-sufficiency and economic stability.
Export tariffs increase the costs of selling valuable domestic products and goods overseas. As a result, this form of tax aims to discourage international trade and stimulate domestic business.
4 common types of tariffs
There are many types of tariffs and trade barriers. Here are four of the most widely used tariffs:
- Specific tariffs
- Ad valorem tariffs
- Compound tariffs
- Quota-based tariffs
Let’s take a closer look at each of them.
1. Specific tariffs
A specific tariff is a fixed fee applied to each unit of imported goods or products.
For example, a country may impose $10 in fees on every pair of imported shoes and $100 on every imported smartphone.
Specific tariffs can be levied on many different types of goods and products. However, they can’t be imposed on goods that differ vastly in value, such as diamonds, art, or motor vehicles.
2. Ad Valorem tariffs
The term ‘Ad Valorem’ is Latin for ‘on the value.’ This type of tariff is levied as a percentage of the value of goods or products.
Usually, ad valorem tariffs are reserved for products or goods with differences in value, such as cars – you can buy a car for $10,000 or $1,000,000.
For example, say you import a diamond watch worth $5,000, and there’s an ad valorem tariff of 50%. You would need to pay $2,500 in fees. However, if you import a watch worth $100, your tariff will be $50.
3. Compound tariffs
As the name implies, a compound tariff is about combination – the specific tariff and the ad valorem tariff.
Here’s how it works: Say a country imposes a $4 specific tariff on every litre of imported oil, plus a 25% ad valorem tariff on the value of the total amount of oil. And, let’s say you import 1,000 litres of oil, and each litre costs $10.
In this scenario, you’ll need to pay $10,000 for the oil, $4,000 in specific tariffs, and $2,500 in ad valorem tariffs.
4. Quota-based tariffs
A quota-based tariff is sometimes referred to as a sliding scale tariff. This type of tariff is based on the scale or quota of your imports.
For example, say you want to import 1,000 rubber ducks. The government will tax you $1 on every rubber duck, up to 500 ducks – those first 500 ducks are your tariff-rate quota.
The government will then charge you $5 for each of the remaining 500 ducks because you have exceeded your tariff-rate quota.
Tariff vs duty
The terms ‘tariff’ and ‘duty’ are often used interchangeably. However, there is a small difference between them.
A tariff refers to the percentage of tax or the specific rate you’ll need to pay on an import or export. For example, if you import guitars to the UK from China, your shipment will be subject to a tariff of 3.2%.
A duty is the total sum of money that you need to pay on the imported products. This amount depends on the tariff. To continue with our example, if you imported £10,000 worth of guitars, you would need to pay import duties of £320.
Free trade vs tariffs
Most tariffs are a form of economic protectionism. These tariffs aim to protect and stimulate the domestic economy.
Unsurprisingly, tariffs are generally unpopular amongst traders and merchants. This is because tariffs restrict international trade opportunities.
Many economists also argue against protectionism and say that trade barriers eventually do more harm than good.
In fact, in the U.S., more than 1,100 economists, including former presidential advisers and Nobel laureates, signed a letter in 2018 warning President Trump about the government’s proposed increase of tariffs.
The letter quoted many parts of another letter sent by economists to the U.S. government in 1930. This historical letter cautioned against the protectionist measures implemented just before the Great Depression.
Most countries have decreased tariffs during the 20th century through treaties such as the General Agreement on Tariffs and Trade (GATT).
These trade agreements remove or reduce tariffs, which allows businesses to trade internationally more freely.
What are free trade zones and how can they benefit your business?
Tariffs can be legally avoided by using free trade zones – also known as foreign trade zones or FTZs.
There are many free trade zones around the world. These zones are designated areas where goods can be bought, sold, manufactured, stored, imported, and exported, without barriers to trade.
Here are four benefits of using free trade zones.
1. Free trade zones don’t have tariffs
Free trade zones allow companies to conduct international business without paying duties. For example, you can ship raw materials into a trade zone, use the materials to manufacture products, then export those products to sell in another country – all without being taxed.
2. You can spread the cost of duties to increase cash flow
When you import goods into a country, you need to pay the duties in one lump sum. However, when you import goods into a free trade zone, you won’t need to pay duties until the products leave the FTZ and enter the host country. This allows you to spread the cost of duties.
3. You can manage quota-based tariffs to reduce costs
Free trade zones allow you to import, manufacture, and store goods, without ever using your tariff-rate quota. This will enable you to strategically move goods out of the free trade zone when it’s most cost-effective. For example, once you’ve used up your tariff-rate quota, you can wait until the start of a new quota period to continue moving goods into the host country to minimise taxes.
4. You can choose to pay tariffs on materials or finished goods
Sometimes, the tariffs imposed on raw materials end up costing more than the finished product’s tariff. In this case, you can import the materials into a free trade zone and manufacture them. Then, when you transport the finished products into the host country, you’ll pay less in duties.
What are HS codes?
When dealing with tariffs, you need to understand HS codes.
HS codes – also known as HTS codes – are used by governments worldwide to classify goods and products.
These codes are part of the Harmonised Commodity Description and Coding System developed by the World Customs Organization (WCO). More than 200 countries use this system as a way to manage tariffs. Consequently, you’ll need to know the relevant HS Codes to handle the customs process.
Every country uses the same first six numbers, but many countries add additional numbers to customise HS Codes.
For example, every country begins the HS code for acoustic guitars with 920290. However, in the UK, the HS code is 9202903000.
Make sure you use the correct HS Code for the country you are importing products or goods into.
How to find out what tariffs apply to your shipments
Before you place an order with a foreign supplier, it’s wise to know how much you’ll need to pay in duties.
Thankfully, there are many simple ways to look up a tariff.
In this section, we’ll run through how to find out what tariffs apply to your shipments. We’ll explore online calculators and the official government websites for the UK, the EU, and the U.S.
1. Use an online calculator to research tariffs
There are countless duty calculators available online, such as:
The Simply Duty calculator allows you to conduct up to five calculations for free each day.
Once you’ve input the relevant information, this duty calculator will provide a breakdown of the duties, value-added tax (VAT), and even your total landed cost.
Tariffs change, so it’s best to check that you’re using the correct rate by heading to the relevant government website.
2. How to research UK tariffs
If you want to research a UK tariff, head to the GOV.UK Trade Tariff page.
If you don’t know the HS Code, search for your goods or products using the search bar at the top of the page.
Once you’ve found the correct listing, you’ll be taken to a page that lists every UK tariff, duty, and VAT rate that applies to those products or goods.
3. How to research U.S. tariffs
To start researching a U.S. tariff, head to the government’s USITC Tariff Database.
Like the UK tariff database, you’re able to use the search bar at the top of the page to find specific products or goods.
In this example, we’ve searched for “hats” and selected the first option available for cotton headwear.
Once you’ve identified and clicked on the appropriate listing, you’ll see a page featuring the tariffs and trade data for those products or goods.
You can scroll down to discover the U.S. tariffs that apply to your shipments.
4. How to research European tariffs
To learn about the European tariffs that apply to your business, head to the European Commission’s Trade Market Access Database.
Before you can search for a European tariff, you first need to know the relevant HS Code. To find this, click on “Find my product code.”
Next, you’ll see an extensive list with multiple drop-down options to help you hone in on the HS Code you need.
Once you’ve identified your HS Code, copy it to your computer’s clipboard and go back to the main European tariff search page.
Then, select the country you plan to import goods from. In this case, we plan to export felt hats from China and import them into Europe. Finally, paste the HS code and click “search.”
Now, you should see all the European tariffs that relate to your products and goods.
Summary: everything you need to know about tariffs
If you plan on trading across borders, it’s vital that you understand the role of tariffs. In summary:
- Tariffs are taxes that governments impose on imports and exports. There are many different types, such as specific, ad valorem, compound, and quota-based.
- The terms ‘tariff’ and ‘duty’ are often used interchangeably. However, ‘tariff’ refers to the tax rate and the type of tax. On the other hand, ‘duty’ refers to the actual amount of money you’ll pay in import or export taxes.
- Tariffs are a form of protectionism used by governments to achieve economic or political goals. However, they are widely unpopular among economists and traders.
- Free trade zones are specific areas within a country that don’t have any barriers to trade. Businesses can use FTZs to import, export, buy, sell, manufacture, and store goods without paying duties.
- HS Codes are six-to-ten digit numbers used to identify products and goods around the world. You can use HS Codes to look up tariffs.
Handling shipping taxes and regulations can be challenging, so you may want to consider hiring a customs broker. These experts will handle the bureaucracy for you, and ensure your shipments reach their destinations on time.